Rising craft brewers rocked by Smuttynose's struggles

Friday

HAMPTON — David Rowland had just opened SoMe Brewing Co. in York, Maine, with his father when he took a tour of Smuttynose Brewing Co.'s new cutting-edge Towle Farm Road facility in 2014.

The facility was a Taj Mahal of brewing that left Rowland awestruck. The only place he had seen a bottling line so "massive" was at Redhook Brewery in Portsmouth. He said its state-of-the-art centrifuge, which spins beer to enhance its clarity and preserve more of the beer made, would have left any brewer jealous.

Rowland said he was surprised to learn Smuttynose was struggling financially.

Smuttynose, launched in 1994 with an annual capacity of 4,500 barrels, is considered by many to be the godfather of New Hampshire's craft beer scene. Its first releases, on draft and in bottles, were Shoals Pale Ale and Old Brown Dog.

"Peter and Joanne (Francis, Egelston's partner) are really the pioneers of the current craft beer scene here, paving the way to make all of our journeys so much easier," said Nicole Carrier, co-owner of Throwback Brewery in North Hampton.

Annette Lee, co-owner and brewer at Throwback, got her start in brewing as an intern at Smuttynose about 10 years ago.

But a boom in smaller breweries, coupled with the high costs of the 13-acre campus on Towle Farm Road, which includes the Hayseed Restaurant, have been cited as reasons for Smuttynose's decline. Now Smuttynose will be sold at a foreclosure auction March 9.

Brewers like Rowland described changes in the marketplace that hurt Smuttynose as occurring practically overnight. The number of New Hampshire's smaller breweries grew from a handful to dozens in just a few years. They said Smuttynose's woes give them pause to consider the rate at which they grow.

Rowland said Smuttynose's difficulties reminded him of how his brewery considered spending $2 million on a new production facility a few years ago. SoMe was struggling to meet its demand, making it consider building a new, larger facility, he said.

"We're just four years old now, and I'm going, ‘OK, I'm glad we didn't put in that $2 million production facility.’ Then we'd have to compete with all these new breweries," Rowland said. "We could get big if we wanted to, but you know, we want to be smart about it."

As a University of New Hampshire graduate 26 years ago, Joe Berwanger was inspired by the variety of beers on tap at the Portsmouth Brewery, which Egelston opened in 1991 in downtown Portsmouth. The Portsmouth Brewery is not part of the foreclosure auction.

Today, Berwanger is co-owner and brewer at Neighborhood Beer Co. in Exeter, which is among the numerous small breweries that added to Smuttynose's competition.

Berwanger said breweries need to be strategic in how they invest their capital, balancing their ability to produce enough beer while not becoming so big they can no longer be flexible. He said smaller breweries have the ability to put out new beers very quickly, which is key in the current marketplace.

Berwanger said Smuttynose’s move to Towle Farm Road may have been too big a jump for Smuttynose, but he argued that may not have been evident at the time.

Egelston said last month that Smuttynose’s financial models were based on 20 years of consistent growth when it made the decision to expand in Hampton. However, he added, “the explosion of microbreweries led to changing dynamics in the marketplace."

"At the time, it might have seemed like the right move," Berwanger said. "I think now, taking a step back, it might have been too big too fast."

Dane Nielsen, co-founder of Liars Bench Beer Co. in Portsmouth, said he saw a similar struggle when he worked at Magnolia Brewing Co. in San Francisco, which was ultimately bought by a conglomerate of breweries. The brewery moved from a three-barrel brew house to a 30-barrel facility, and he said it consequently struggled to sell all the beer it produced.

"It was a jump," said Nielsen, not one unlike the jump Smuttynose took in growth. "(Smuttynose) kind of gave us a heads up on what would happen if we were to reach that scale, and we've been really, really cognizant of that and our growth process."

The fate of Smuttynose

Experts say Smuttynose still holds value as a brand for the following it has developed over the last 24 years, though some believe its financial struggles could lessen that value.

Jeff Sohl, director of the University of New Hampshire's Center for Venture Research, believes Smuttynose's financial problems will likely cause a discount in its sale price, although he said it is difficult to say how much.

UNH marketing professor Tom Gruen believes a number of suitors could be interested in the Smuttynose brand because it has strong distribution in states throughout the Northeast and Atlantic coast. He also said its Hampton facility holds significant value, not only for its state-of-the-art equipment but also the amount of beer it can produce. Smuttynose can brew up to 75,000 barrels a year, but it has not been operating at capacity.

Gruen believes a regionally sized brewery in another part of the country could be Smuttynose's most likely buyer. He said such a buyer based somewhere far from New England, like out West, may want to expand its distribution into the Northeast by purchasing Smuttynose and using its facility to produce both products.

"The brand has good distribution, it has a good following," Gruen said. "A lot of their issue is simply cash flow."

Smuttynose, which began operations on Heritage Avenue in Portsmouth in 1994, generates more than $10 million a year in revenue and Smuttynose brands as a whole outsell all other breweries in the state by a wide margin, Egelston previously said. The brewery's Finestkind IPA is the top selling IPA in New Hampshire, he said.

“We still sell a sizable amount of beer, just not enough to pay our bills and I guess at the end of the day that’s what it really boils down to,” Egelston said last month when discussing the upcoming foreclosure auction.

Owners of stores that sell craft beer said their Smuttynose sales dropped as consumers became more inclined to try the many smaller, hyper-local brands that fill their shelves and refrigerators. Amy Odiorne, manager at Gary's Beverages in Portsmouth, said Smuttynose still has a noticeable following but fewer people have been buying its beers than in past years.

Greg Boulanger, who owns Greg & Jane's Beer & Wine in Epping, said younger customers typically buy beers from smaller local breweries, describing Smuttynose as bought by "people in their 60s." While Smuttynose is still a smaller brewery in the context of the national beer industry, Boulanger said customers have appeared to view the smallest breweries as most representative of what defines craft beer today and Smuttynose as closer to a Budweiser brand.

Egelston said hearing anyone associate Smuttynose with Budweiser "kind of breaks my heart" considering Smuttynose's facility put out 50,000 barrels a year at its peak, much lower than the millions produced by major companies.

Boulanger believes Smuttynose failed to produce successful new beers in recent years, putting it behind in an industry where consumers seek variety.

Egelston said it was inaccurate to say his company did not consistently brew new beers, saying new brews were produced including through Portsmouth-based sub-company Smut Labs. But Boulanger said those new beers by were not successful in his store. Some of the new Smuttynose beers, he added, were also only sold in restaurants and did not make it to his shelves.

"Smuttynose never stayed up with the curve," Boulanger said.

Smuttynose was also negatively impacted by a shift in consumer preferences from bottled to canned beer. This came after Smuttynose installed a state-of-the-art bottling system, but lacked on-site canning ability. Most of the smaller nanobreweries across the Seacoast sell beer exclusively in cans or Growler bottles.

Ben Keene, editor in chief at the website Beer Advocate, said Smuttynose's core beers were "great examples of American craft beer" five to 10 years ago." Since then, he said its popularity has seemed to dwindle, especially outside its immediate region.

"I have heard a lot of people say that they haven't had a Smuttynose beer in years and that the products they are releasing just aren't enticing to them," Keene said. "While Smuttynose still has some value and some strength to it, I think it's almost kind of plateauing."

Some craft breweries have been purchased by major beer companies recently, but Keene said those companies prefer buying craft breweries on the rise and Smuttynose likely would not fit that criteria.

Tyson Demers, a brewer at Smuttynose, said he found out about the sale at about the time the company announced it publicly in January. He said employees were aware of the market shifting and how it could impact their brewery. Smuttynose has 68 employees.

Demers said it was sad to learn of the sale, that workers have a mixture of "hope and sadness," but are optimistic a buyer will keep Smuttynose operating.

"It seems silly to me they would change a lot of what's going on because I feel like we were going in the right direction," Demers said. "We're a solid brand ... we still have a following and, myself, I feel like I'm going to still be brewing Finestkind IPA."

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